Home affordability, neighborhood safety and school quality top criteria for first-time homebuyers

Dante and Jodi Peduzzi dotted that last "i" in their signatures in December 2009 on a contract that made them the owners of a 1,600-square-foot home in Houston where they'd soon begin to raise a family.

The Peduzzis originally intended to live near downtown, "inside the loop" as it's called, but after realizing their home price expectations for that area were unrealistically low, they settled on a rental inside the loop instead. According to the National Association of Realtors, they were just like the 77% of first-time homebuyers who rent prior to purchasing their first home.

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"At first we were scared (to purchase a home), and that's what helped us decide to wait," Dante says. "We kept looking almost once a week on the market to gauge what was going on, but we didn't actually pull the trigger for another two years."

They saved money, monitoring and waiting patiently for mortgage rates to fall further than they already had. Home affordability, to them and most first-time homebuyers, was crucial.

Dante, who moved to Houston in 1993, believes the large metro is a perfect market for first-time homebuyers.

"It's very flat and less risky than other markets in terms of large swings," he says. "The economy and home values are less volatile. We were one of the last to get hit and one of the first to recover. I won't say that's solely due to the oil and gas industry, but it's definitely correlated."

In addition to the city's robust energy industry, the Bayou City is home to the ever-expanding Texas Medical Center, which employs more than 70,000 people.

And with that population and employment growth comes housing demand and rising home prices. David Stiff, chief economist at Fiserv, says home prices will move sideways in 2012, but "some larger metros that escaped the worst of the housing bubble such as Houston, Fort Worth, Texas, and Salt Lake City can expect increases of 1% to 3%."

TYPICAL FIRST-TIME BUYER

The typical first-time homebuyer is 31 and earns $62,400 a year, according to a 2011 National Association of Realtors. The median price of a home purchased by a first-time buyer is about $155,000 versus $219,000 for repeat buyers.

First-time buyers usually plan to stay put for 10 years as opposed to repeat buyers who plan to hold their property for 15 years, NAR says. And while 72% of first-time buyers who have children under age 18 — such as the Peduzzis — are influenced by the quality of the neighborhood when choosing their home, 44% are influenced by affordability. Nearly 60% of first-time homebuyers consider convenience to their jobs and the quality of the school district when deciding where to buy.

Jodi says emotions were running high during their house-hunting process. They kept each other grounded, making sure they asked the right questions and made the proper decisions before embarking on the next step of finding that perfect first home, which appeared serendipitously.

"It was right when the market was crashing as home prices were dropping and the market quickly turned to a buyers' market so it was perfect timing for us," Jodi says. "When we bought the home at the time, I think it was near historical low rates for mortgage interest."

Nearly 95% of entry-level buyers choose a fixed-rate mortgage, NAR said. More than half of them finance with a low-down payment FHA mortgage, and 6% use the Veteran Affairs loan program, which requires no down payment, another indication that first-time homebuyers look at affordability as their No. 1 priority.

Houston is wide and diverse enough to afford first-time buyers a vast range of options. Dante and Jodi were "highly against" long work commutes.

As with any large city, the further a buyer is from its epicenter, the less expensive and relatively more affordable the houses become. "We think it's worth paying more for a smaller house to avoid the commute so we planned on living as close to downtown as possible as long as we can," Jodi says.

Still, Houston's affordability rate trumps other large metros like Chicago, Seattle and Miami.

The median-size home for first-time buyers is 1,570 square feet and 2,100 square feet for repeat buyers, NAR found. Interestingly, the typical monthly mortgage payment is less than rent on a comparably sized home.

First-time homebuyers accounted for 50% of home sales in 2010, but a steady rise in costs of small-down-payment mortgages, a first-time buyer favorite, helped to shrink that share in 2011 to 37%.

The value of the Peduzzi's home, just two years after moving in, is 5% more than what they paid for it. They plan on staying at least one more year to fulfill the three-year commitment to prevent paying back the homeowner tax credit.

With the one child, 7-month-old Dominic, the Peduzzis say they are already close to outgrowing their first home. Once the couple has a second child, they said they'll look for a larger home with a larger yard, but don't want to have to sell their current one to pay for the next. When they have enough savings, they'll purchase a second home while renting out the one they live in now.

And to accomplish that, the Peduzzis took advantage of the record low mortgage interests rates, refinancing from a 15-year fixed rate to a 20-year fixed rate to lower their monthly payments so that when they eventually rent out their current home, they'll be able to cover their monthly mortgage payments and any additional taxes.

Even though they believe Houston's housing market is on the rise, the Peduzzis understand the new and long-term dynamics of the housing economy they've entered.

"I do think I'll sell it at a profit but, that is not an expectation I hold close," Dante says. "Whatever plans I have in buying my next home, I won't count on making a profit. I'll probably count on taking a loss just to be conservative."

HousingWire examines the top five and bottom five markets for first-time homebuyers. Using data supplied by the National Association of Home Builders, the U.S. Department of Education and the Federal Bureau of Investigation, it analyzes the school quality, crime rate and unemployment rate of the 40 most affordable housing markets and the 40 least affordable. Because school quality figures were available at the state level and not local, that measurement received lesser weight.

See the March 2012 magazine flip book to read about the top five and bottom five markets for first-time homebuyers.

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Just Hilley was a reporter with HousingWire, where he was a specialist on the servicing industry and investments. A former tax accounting consultant, he returned to his prior industry in late October 2012.

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